12 Days of SSAP: New Market Tax Credit Project – Deep Dive

As we discussed in the previous post, modifications to SSAP Nos. 34 – Investment Income Due and Accrued, 93R – Low Income Housing Tax Credit Property Investments, and 94R – Transferable and Non-Transferable State Tax Credits included minor consistency and clarifying revisions and one notable revision to SSAP No. 93R. That revision was made in response to concerns from interested parties over the paragraph 18 admittance test (now referred to as the Prospective Utilization Assessment).

It was noted that under current statutory accounting guidance, the admittance criteria in SSAP No. 94 are applied to characteristics that perhaps may not be factors that would impact admittance:

• A tax credit that does not expire would be precluded as an admitted asset
• A non-transferable tax credit that can be carried-forward, carried-back, able to be refunded or that can be sold or assigned, is precluded as an admitted asset

As such, after addressing the comments and recommendations of the interested parties, the Prospective Utilization Assessment was revised to remove the initial assessment of the current portion of unallocated tax credits and replaced with language that required companies to perform the Prospective Utilization Assessment only if certain conditions exist as follows:

• Reporting entity records a valuation allowance against a deferred tax asset (DTA) balance.
• Reporting entity becomes aware of other facts and circumstances which indicate that it will, more likely than not, be unable to substantially utilize the unallocated tax credits. Such instances include, but are not limited to:

1. 1. If the reporting entity holds an investment which allocates state premium tax credits and intends to decrease premium volume in that state, it may affect whether the unallocated tax credits in that state can be utilized.
   2. If the reporting entity holds an investment allocating state income tax credits and records a valuation allowance in its U.S. GAAP financial statements against state DTA balances, including the same state as the tax credit investment, it cannot ignore the circumstances that led to the valuation allowance, even though statutory accounting does not permit state DTAs.

Consequently, the working group sponsored a blanks proposal on the annual statement reporting categories for tax credit investment risk-based capital (RBC), issued a referral to the Life Risk-Based Capital (E) Working Group to inform it of the planned reporting line changes, and drafted an issue paper to document the discussions and revisions for the New Market Tax Credit Project (NMTC).

However, after adopting this new SAP concept in March, regulators received questions from public accounting firms on the accounting guidance and example journal entries provided in the new guidance. It was noted that the SSAP No. 94R accounting guidance appeared inconsistent with the journal entry examples, and the guidance in SSAP No. 93R for recognizing allocated tax credits was confusing compared to the journal entry examples.

After performing another review, regulators determined that the journal entries accurately reflected the accounting for recognition and utilization of tax credits. As such, revisions have been drafted to revise the accounting guidance to match the journal entry examples more accurately. However, it was noted that a sentence in SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies was inadvertently not updated as part of the NMTC project. Updates to this sentence and final revisions to SSAP No. 93 and 94R were adopted at the Fall National Meeting in November.

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